Chapter 16 Section 3 and 4

 RRR – required reserve ration ◦ Cash deposit x (1/RRR) = the money multiplier ◦ Simplest way to change M2 ◦ Increase Reserves = Decrease in money supply ◦ Decrease Reserves = Increase in money supply ◦ Rarely used in today’s economy

 This is the interest rate that the Fed charges on loans to financial institutions. ◦ Usually will set a “target level” for loans to be set at. ◦ Prime rate – rate of short-term loans to their best customers ◦ Increase IR = less M2 ◦ Decrease IR = more M2

 Buying and selling bonds ◦ the most important and most used monetary policy tool ◦ Can be done smoothly and on an ongoing basis

 Money supply increase – interest rates decrease  Money supply decreases – interest rates increase

 When policy is made, it must be made at the correct time of the business cycle or adverse effects can take place.  Inside lag – the time it takes to implement monetary policy  Outside lag – the time it takes for monetary policy to have an effect  Is it better left alone?